Wednesday, April 30, 2008

The fundamentals of Money Market in India

RBI announced its annual Monetary Policy yesterday. There's a lot of talk on CRR, repo rates, reverse repo rates, market stabilization schemes, Dollar buying, etc. I have been trying to make sense out of the jargons and thought it a good idea to understand the framework in which all these jargons are used.

I made 23 slides on the fundamentals of Money Market in India which I'm uploading below.

A few things :
  • CRR (Cash Reserve Ratio) is the amount of cash that commercial Banks have to keep with the RBI. This has been raised by over 175 basis points over the year. The idea is to drain excess liquidity. This in turn should work to contain inflation.
  • Reverse repo rate(6%) is the rate at which RBI absorbs liquidity and the repo rate(7.75%) is the rate at which it injects liquidity.
  • The call money market should theoretically operate between these two rates.
  • The other ways of soaking liquidity from the market is Market Stabilization scheme (MSS) and buying Dollars.

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